Significance of Director’s Disclosures and Declarations [MBP-1 & DIR-8]
A Company is an artificial legal entity that requires natural persons, specifically the Board of Directors, to represent it on various fronts and oversee its daily activities. The Board of Directors is a panel of people elected by shareholders to act as their representatives and play a crucial role in setting the direction and strategy of the Company, overseeing its management, and ensuring that the Company operates in the best interests of its shareholders.
The Companies Act, 2013 has made it mandatory for Directors of the Company to make various declarations and disclosures of their interests to the Company and its shareholders, as the success and sustainability of the company depend on how well the board functions.
Provisions of the Companies Act, 2013 that deals with disclosures and declarations
The Companies Act, 2013 contains various sections dealing with disclosures and declarations including:
- Section 149(7) – Declaration of Independence, if he sought to be appointed as Independent Director.
- Section 164 – Disqualification for Appointment of Directors
- Section 166 – Duties of Directors
- Section 167(1) (c) &(d) – Vacation of Office of Director
- Section 184 & Rule 9(1) – Disclosure of interest by Directors
- Section 189(2) – Register of contracts and arrangements in which Directors are interested.
Directors’ disclosure and declaration: What they are and why they matter?
Directors’ declarations are statements made by Directors of a Company about their personal circumstances and interests, including their shareholding in any body corporates, firms or other associations that may impact their ability to act in the best interests of the Company. These declarations are an important tool in ensuring that Directors are transparent and accountable to shareholders, stakeholders, regulators, and the public.
An individual appointed as a director must disclose the following to the Company and shareholders:
- Consent to act as director in Form DIR-2 before his appointment.
- Whether they have been disqualified from being appointed as director or not in Form DIR-8.
- Details of the entities in which he is interested as a director or partner or member in form MBP 1.
- A declaration of independence if they sought to be appointed as an Independent Director.
- A declaration that they are not debarred from being appointed as director by SEBI or any other authority if they sought to be appointed as director of a Listed Company.
Why Director’s declarations matter
- Shareholders have the right to know if directors have any conflicts of interest, financial or otherwise, that may impact their decision-making.
- They act as an important safeguard against unethical behavior, as the company can detect and prevent potential conflicts of interest or situations where a director may be using their position for personal gain.
- Moreover, directors’ declarations can help to build trust and confidence in the company which in turn demonstrates that the company is committed to moral and responsible governance when directors are open and transparent about their personal circumstances and interests.
When to Disclose the interest?
The disclosure of Directors’ interests can be classified into two types: general or annual disclosure and specific disclosure.
1.General/Annual Disclosure of Interest:
Every Director must disclose their interests and give declarations if any:
- At the first Board Meeting in which he participates as a director for the first time.
- At the first Board Meeting in every financial year.
- At the first Board Meeting held immediately after any change in the prior disclosures of his concern/ interest in any body corporate/firm/association of individuals, including details of the shareholding.
2.Specific Disclosure of Interest:
Specific disclosure is required when a director becomes concerned or interested in a contract or arrangement that the company discusses in the board meeting. Every Director shall:
- Disclose the nature of their concern or interest at the Board Meeting in which the contract is discussed and should not participate in such meeting.
- If a director becomes concerned or interested after the contract or arrangement is entered into, they must disclose it to the Board immediately or at the next Board Meeting held immediately after that.
A director is considered interested or concerned in a contract or arrangement entered or proposed to be entered into by the company-
- With a body corporate in which they are a director, promoter, manager, Chief Executive Officer or holds more than 2% of the shareholding in a body corporate either individually or in association with any other director.
- With a firm or other entity in which they are a partner, owner or member as the case may be.
Furthermore, Directors and Key Managerial Personnel must disclose their interests or concerns to the Company within 30 days of their appointment or relinquishment of their office.
What are the prescribed forms for disclosing interest/ giving declarations?
1.Form DIR-8: Intimation by Director confirming non-disqualification.
The director should give a declaration in writing to the company confirming that they have not incurred any disqualification under Section 164(1) and the list of companies in which they are/were a director, and such companies have not been non-compliant as per Section 164(2). This declaration should be given in advance of the Board Meeting in Form DIR-8 and cause it to be disclosed at the meeting held immediately after that.
Click Here to find the format link of the Form DIR-8.
2. Form MBP-1: Disclosure of interest by Director.
A director should also disclose their interests or concerns or any changes with respect to their interests in the companies or body corporates etc., in Form MBP-1.
Click Here to find the format link of the Form MBP-1.
Consequences of Non-Disclosure of Director’s Interests:
Failing to disclose their interests can lead to severe consequences for Directors and a few of them are discussed below:
a) Vacation of Office of Director:
A director can be forced to vacate their office if they incur any disqualifications specified under section 164 of the Companies Act, 2013.
b) Levy of Penalty:
A penalty of Rs. 1 lakh can be levied on the director for contravening the provisions of section 184 of the Companies Act, 2013, by not disclosing their interests.
c) Directors Obligations:
Section 166 of the Companies Act, 2013, stipulates that directors must act in the best interests of the company and avoid situations where their interests conflict with the company’s. And violating this provision could result in a penalty of at least Rs. 1 Lakh, but which may extend to Rs. 5 Lakhs.
d) Register of contracts or arrangements in which Directors are interested:
It is mandatory for every company to maintain a register of contracts and arrangements in which directors are interested, and failing to do so could result in a penalty of Rs. 25,000 for every director.
To summarize, it is essential for Directors to maintain transparency and accountability by ensuring timely disclosures and declarations. Compliance with disclosures and declarations is not just a legal duty, but also a fundamental ethical responsibility of directors to prioritize the company’s and stakeholders’ best interests.
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